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Computing business cycles in emerging economy models

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  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Horacio Sapriza

Abstract

We show that computing business cycles in emerging economy models using the discrete state space technique may be misleading. We solve the models of sovereign default presented by Aguiar and Gopinath (2006) using interpolation. We find that the simulated behavior of the spread is quite different from the behavior obtained using discrete state space. In fact, some of the results obtained by Aguiar and Gopinath (2006) using discrete state space are reversed when using interpolation. Our analysis thus provides a new set of benchmark results for quantitative models of sovereign default. ; Updated by Working Paper 09-13

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 06-11.

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Date of creation: 2006
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Handle: RePEc:fip:fedrwp:06-11

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Keywords: Business cycles;

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References

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  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  2. Michael Kumhof, 2004. "Fiscal Crisis Resolution: Taxation versus Inflation," Working Papers 102004, Hong Kong Institute for Monetary Research.
  3. Neumeyer, Pablo Andrés & Perri, Fabrizio, 2004. "Business Cycles in Emerging Economies: The Role of Interest Rates," CEPR Discussion Papers 4482, C.E.P.R. Discussion Papers.
  4. Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets," Working Papers 2006-02, Banco de México.
  5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  6. Mark Aguiar & Gita Gopinath, 2004. "Emerging Market Business Cycles: The Cycle is the Trend," NBER Working Papers 10734, National Bureau of Economic Research, Inc.
  7. Mark Aguiar & Gita Gopinath, 2004. "Defaultable Debt, Interest Rates and the Current Account," NBER Working Papers 10731, National Bureau of Economic Research, Inc.
  8. Vivian Z. Yue, 2005. "Sovereign Default and Debt Renegotiation," 2005 Meeting Papers 138, Society for Economic Dynamics.
  9. Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  10. Yan Bai & Jing Zhang, 2009. "Financial Integration and International Risk Sharing," Working Papers 594, Research Seminar in International Economics, University of Michigan.
  11. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2006. "Sovereign default risk with heterogenous borrowers," 2006 Meeting Papers 845, Society for Economic Dynamics.
  12. Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Terms of Trade and Interest Rates in Emerging Markets," Working Papers 2006-01, Banco de México.
  13. Michael Kumhof & Evan Tanner, 2005. "Government Debt," IMF Working Papers 05/57, International Monetary Fund.
  14. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
  15. Cristina Arellano & Ananth Ramanarayanan, 2006. "Default and the Term Structure in Sovereign Bonds," 2006 Meeting Papers 299, Society for Economic Dynamics.
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Citations

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Cited by:
  1. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
  2. Leonardo Martinez & Juan Carlos Hatchondo, 2008. "A model of credit risk without commitment," 2008 Meeting Papers 940, Society for Economic Dynamics.
  3. Lizarazo, Sandra, 2010. "Default Risk and Risk Averse International Investors," MPRA Paper 20794, University Library of Munich, Germany.
  4. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2006. "Sovereign default risk with heterogenous borrowers," 2006 Meeting Papers 845, Society for Economic Dynamics.

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